TPP or ASEAN +3: Alternative Plans for Regionalism and Free Trade Pacts

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ASIA AT A TIPPING POINT:

KOREA, THE RISE OF CHINA,

AND THE IMPACT OF

LEADERSHIP TRANSITIONS

EDITORINCHIEF:

GILBERT ROZMAN

Vol. 23

2012

JOINTU.S.KOREA

ACADEMIC

STUDIES


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Joint U.S.-Korea Academic Studies2012

Volume 23

Editor-in Chief:Gilbert Rozman, Princeton University


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TPP or ASEAN+3: Alternative Plans for

Asian Regionalism and Free Trade Pacts


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186 | Joint U.S.-Korea Academic Studies

INTRODUCTION

Korea is on the front line between two contrasng proposals for regionalism

based on economic integraon. On the one side is the Chinese eort to establish

an exclusive economic bloc in East Asia, starng with ASEAN+3 and the trilateralSino-Japanese-South Korean summit. Given the growing dependence of the South

Korean economy on China and the launching of FTA talks between South Korea

and China in 2012, resistance to Chinas persistent overtures may prove dicult.

On the opposite side are the TPP talks aiming for an agreement at the end of 2012,

which Japan has considered joining since November 2011. This agreement would

build on the racaon of the Korean-U.S. FTA by both Washington and Seoul in

the fall of 2011 if South Korea decided to join. With its emphasis on seng a high

standard for economic exchange and corporate governance, this would establish

a united front to encourage China to separate polics from economics if it did

not want to be excluded from the next wave of instuonalizaon of economic

es. In a year of elecons, South Korea straddles the two possibilies, as the

opposion calls for renegoang the KORUS FTA and the public remains wary of

negoang an FTA with China, deepening dependency.

Ed Lincoln explains U.S. interest in TPP. He traces the ming to a drawdown in the

Iraq and Afghanistan wars, and a recovery from a preoccupaon with security and

the 2008 world nancial crisis. Nong the increasingly asserve nature of Chinese

policies, he observes that U.S. entry into TPP negoaons came at a me when it was

convenient to express displeasure toward China. The core of his argument deals with

the prospects for nding another way forward aer the dismal record of the Doha

Round of negoaons on a global level that permits agreement on services, which

are a U.S. advantage, and for reviving trade talks with Japan aer a hiatus of een

years in eorts to deal with its trade barriers. Lincoln argues that the TPP ts logically

into the evoluon of U.S. foreign policy aer opposion to bilateral and regional

agreements dissipated, as a way to obstruct a purely East Asian form of regionalism

that would interfere with both economic and strategic goals, and as a means to gain

greater U.S. access for internaonally compeve service industries.

Hyung-Gon Jeong lays out the calculaons of South Koreas relave gains in

choosing one opon or the other. He explains U.S. moves, which include stymieing

Chinas inward looking strategies, acquiring leadership, and transforming the

Chinese economic system in its favor. Jeong proceeds to consider Japans moves

for joining the TPP, including opening Japan as a new engine to connect it to global

economic trends, changing its agricultural structure, and consolidang its alliance

with the United States in the face of concerns about China and compeon with

South Korea. Finally, he notes Chinas new exibility in support of an ASEAN+6

FTA and its renewed push for an FTA with Japan and South Korea, as it shows

anpathy toward the TPP while keeping its opons open. In these circumstances,

Jeong esmates that South Korea would gain more from an ASEAN+6 FTA thanfrom the TPP. Yet, he suggests that if Japan were to join the TPP, however unlikely,

this would likely trigger South Koreas decision to join. He concludes that it should

not rush, as the pros and cons of joining are sll uncertain, while watching the

movements of China and Japan as the new organizaon is taking shape.


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Peter Petri explains that the compeon in the Asia-Pacic takes places in a

highly posive-sum context. Warning that the early contest between the TPP

track advocated by the United States and an exclusively Asian track pressed by

China may lead to hardened posions that preclude later convergence, Petri

opmiscally envisions a mul-stage process with benets to China and the

United States from consolidang the two tracks as liberalizaon progresses along

each of them. In the rst stage he nds that the benets will depend in large part

on preferenal access to the markets of the United States and China, yielding

important gains for smaller countries. In the second stage, integraon would

extend to several large economies on each track, and countries that join both

tracks would benet the most. Finally, in the third stage China and the United

States would be le among the few economies without preferenal access to

both of their large markets. A consolidated agreement would enable them to

realize most of the gains, providing incenves for these states to move to thisstage of deep economic integraon. Without taking account how the impact

of the factors raised in Parts 1, 2, and 3 of this book will play out, this upbeat

analysis of the momentum economics can generate oers a hopeful prognosis.

The three chapters of Part 4 are the sort of accessible economic analysis

that should cauon crics of polical leadership struggles, natural security

dilemmas, or naonal identy gaps from dwelling on negave tendencies. Yet, as

economists are opmiscally showing the way toward mutual prosperity based

on sll signicant complementaries, there are undercurrents that should not be

overlooked. East Asian states not only have vested great presge in economists whohave shown the way toward successive economic miracles, an unprecedented

rate of regional economic integraon, and widespread public support for not

falling behind their neighbors enthusiasm for more FTAs, they have also kept

control in the hands of policians who were well known for ercely protecng

parcular sectors of the economy and delaying reforms to open them in the face

of U.S. pressure. Despite the rosy scenarios of a posive-sum race to openness

in the chapters that follow, the path forward is complicated by these policians,

who are under the inuence of ideologies anathema to most economists, and by

public faith in naonal idenes, which are inconsistent with bold reforms.

Two undercurrents keep resurfacing when economists look closely at the U.S.

drive to conclude a planum-standard TPP with wide membership in 2012 and the

Chinese drive to jump-start negoaons for a China-Japan-South Korea FTA from

May 2012. First, many understand this compeon to be driven by hegemonic

ambions, which block not only the ulmate economic prize of one overarching

Asia-Pacic FTA, but also a truly successful outcome in each of the two separate

negoaons. For instance, Japanese fear of U.S. hegemony has not disappeared

aer the trade wars of the 1980s-90s, and South Korean fear that Chinas large

bilateral trade decit amid worrisome levels of dependence leave Chinese feeling

entled to a one-sided, low-level FTA that does lile to open Chinas markets. In

light of erce polical in-ghts, Japan and South Korea may stall.

Introduction: TPP or ASEAN+3


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The other worrisome undercurrent is distrust of Chinas shi toward greater state

intervenon as a fundamental barrier to a high-level FTA. This raises concern that

proteconist measures will take unexpected forms, economic dependency will

enable monopolisc and polical ends, and even that there remains a socialist

core to Chinas market economy. Distrust of China casts a shadow over the Asian

track even prior to the challenge of reconciling the two tracks.

Together the four parts of this book point to conicng currents that leave the

Asia-Pacic future uncertain. Leadership is in the midst of its most far-reaching

transion in decades with lile indicaon of more cooperave atudes. Security

relaons are growing tenser. Naonal identy gaps are widening without

networks likely to reverse the trend. Only economic negoaons suggest a more

opmisc outcome, but they too must overcome polarizing trends. The three

chapters that point the way to new agreements capitalizing on complementary

economies show why naons should overcome bilateral problems, but they do

not contradict views in earlier chapters that indicate how polics, security, and

culture stand in the way.


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The U.S. Approach to

Regional Trade Agreements

Involving East Asia

EDWARD J. LINCOLN


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The U.S. government has had a long and convoluted approach to the issue ofbilateral or regional trade agreements involving East Asian countries. Thispaper focuses on three key aspects of this history: the intellectual bale between

global and bilateral or regional approaches to trade agreements, the relaonship

of trade policy to U.S. security policy, and the rising importance of trade in services.

Fundamentally, American economic policy toward East Asia is rooted in the strategic

involvement of the United States in the region, which leads to a preference for

trans-Pacic trade agreements rather than the intra-Asian alternave. But the U.S.

approach to regional trade issues was complicated over the years due to the strong

belief among economists and government ocials that the global approach to

trade and investment issues is more ecient than a bilateral or regional approach.

Nonetheless, the rising importance of internaonal trade and investment in service

industries has helped push the U.S. government away from its commitment to

the global approach since the World Trade Organizaon has made relavely lileprogress yet on covering these issues. This chapter explores the evoluon of

American policy in the context of these factors.

THE INTELLECTUAL DEBATE OVER TRADE POLICY

For at least the past century, American undergraduate students have been taught about

the virtues of free trade. The theory is rooted in the work of Adam Smiths concept

of absolute advantage (1775) and David Ricardos (1820s) concept of comparave

advantage. In the 1930s, Heckscher and Ohlin extended the theory to explain why

naons have a comparave advantage in parcular products (based on varyingeconomic resource endowments across countries), and shortly aer World War II,

Paul Samuelson added mathemacal rigor to the theory. As taught today, comparave

advantage theory is oen called the Heckscher-Ohlin-Samuelson theory. The basic

conclusion of all versions since the late 18th century is that naons benet from being

open to internaonal trade. There are few, if any, concepts in theorecal economics on

which virtually all economists (at least in the United States) agree.1

Newer theories of trade, such as dierenated products and intra-industry trade,

the product-cycle theory, or external economies of scale and clustering, emerged in

the 1960s and 1970s, but none of them counter the belief that open internaonaltrade is the best policy. For a me, the concept of internal economies of scale led

economists to suggest that proteconism to permit a domesc industry to grow

to a sucient size to achieve lower producon costs might jusfy temporary

proteconism. Dubbed strategic trade policy, the basic idea was that developing

countries could grow industries in which they did not currently have a comparave

advantage, but in which they could become compeve in the future once the scale

of producon grew behind proteconist barriers and as wages rose to a level giving

them a comparave advantage in the protected industry. Japans export success in

the rst three decades aer World War II was oen used as the example of how such

a policy might succeed, as it protected industries such as automobiles in which it had

no comparave advantage in the 1950s. However, the weak economic performance

and inecient industries of most countries that followed such policies (such as India)

caused this concept to be largely abandoned by economists. Today, most economists


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support the noon that even developing countries will perform beer (that is, grow

faster) with greater openness to internaonal trade and investment. That conclusion

has characterized American trade policy for the past two decadesdeveloping

countries should lower their barriers for their own good.

The point of this discussion is that any American taking an introductory economics

course in the past century has been taught the value of free trade. Economic welfare

of the society rises when consumers can purchase products from the most ecient

producers in the world. Nonetheless, the concept of free trade remained unpopular

polically through the 19th and early 20th centuries. Only the economic disaster of the

1930s (during which policians in many advanced countries raised taris) and the

subsequent devastang war led toward polical acceptance of reducing or eliminang

trade barriers. For the Americans, the concept gained addional desirability due to

the strong posion of many manufacturing industries in the immediate aermath of

the war (industries that would benet if barriers in other countries were lowered).

The result was the General Agreement on Taris and Trade (or GATT, now the

World Trade Organizaon, WTO), created in 1947. One of the hallmarks of the GATT

agreement was a principle of most favored naon, which states that any member

naon that permits a lower tari on a product coming from another member must

extend that lower tari to every other member of the GATT. The goal was to end the

discriminaon that had been rampant in the 1930s in which naons had high taris

in general, but applied lower taris to products from some favored trade partners.

The principle of most favored naon became the bedrock for American trade

negoators for the next several decades, and energized an internaonal bargaining

process that lowered trade barriers around the world in a series of mullateral

rounds of negoaons among GATT member countries. However, Arcle 24 of the

GATT (and the follow-on WTO) allowed one excepon to the most favored naon

principle. If two or more members were willing to remove substanally all trade

barriers among themselves, then the agreement would be permied.2 Presumably,

this excepon had been included in 1947 to accommodate the Imperial Preference

System of the Brish Empire (a large free trade area among all the members of the

empire). Lile used by other GATT members, this excepon nally became popular

around the mid-1980s, and the number of such agreements (free trade agreements,or preferenal trade agreements) has exploded since that me. As of 2011, the WTO

reports 319 bilateral and regional preferenal agreements in acve use.3

As these agreements began to proliferate, economists were deeply divided on their

impact. Economists have had three principal objecons to free trade agreements.

First, any agreement between two countries that eliminates tari and other barriers

implies that some imports will be switched from the globally ecient manufacturer

to one located in the partner country. In that case, the government of the imporng

country no longer receives the revenue from collecng the import tari. This loss

of revenue is called the trade diversion eect, and is a net economic loss for theimporng country. Trade diversion also implies an inecient allocaon of producve

resources as less ecient rms benet from exporng to a partner country at the

expense of more ecient rms not located in the trade bloc. Second, every bilateral

Lincoln: U.S. Approach to Regional Trade Agreements


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agreement is negoated separately, so that the coverage and rules will be dierent,

creang what leading trade theorist Jagdish Bhagwa dubbed the spaghe bowl

eect, creang confusion and extra costs for rms as they aempt to keep track

of the mass of diering rules.4 Third, every preferenal agreement must include

rules on what is legimately a product manufactured within the partner country byspecifying the share of local value added in a product necessary to qualify as being

manufactured within the exporng member country. These rules of origin open

the way for challenges and the necessity for adjudicaon of disputes, adding another

layer of cost that does not exist when a tari applies to all imports.

Free trade agreements do, however, have some advantages, not all of which

are strictly economic. First, in an era when membership in the WTO exceeds 150

countries, global agreements have become very dicult to negoate. The current

Doha Round began in 2001 and remains uncompleted eleven years later. A bilateral

or small group agreement can typically be completed within a year or two. The long

wait for progress at the global level means that achieving pockets of progress around

the world might be beer than no progress at all.

Second, these agreements involve trade creaon. Consumers now have access to

imported products at a lower price (since the imports from the partner country enter

paying no import tari), even if the product is not coming from the globally ecient

producer. Lower prices (and expanded consumpon of the imported product)

increase economic welfare (even if not all the way to the maximum level possible

with global free trade). Economists argue that if a naon had relavely low importbarriers to begin with, the trade expansion benet will likely outweigh the trade

diversion loss discussed earlier.

Third, if the number of members in the trade group is greater than two, the possibility

of a globally ecient producer being a member of the group increases, lessening

the global ineciency from switching to products from less ecient producers.

Therefore, economists generally prefer groupings with several members.

Fourth, even if an agreement introduces distorons, the envy of countries not part of

the agreement might lead them to parcipate. Opmists concerning this possibility

see free trade agreements as building blocks toward the eventual goal of global free

trade.5 Or the countries le out might move to re-energize WTO negoaons (and

the creaon of such a movement at the WTO level was a specic goal of the U.S.

government in negoang the North America Free Trade Agreement at a me when

the Uruguay Round of GATT negoaons were stalled at the beginning of the 1990s).

Finally, as the process has evolved, FTAs oen include agreements on both

trade in services and direct investment, two areas in which the WTO has made

relavely lile progress. The Uruguay Round agreement of 1994 did include a

General Agreement on Trade in Services (GATS), but it is relavely weak. This

chapter argues that barriers to trade and investment in the service sector have

gained increased aenon and importance over me.


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Where does the debate stand today? It is fair to say that economics textbooks

generally present a far more favorable view of FTAs than was the case twenty-ve

years ago when such agreements began to proliferate. The concerns raised by Jagdish

Bhagwa remain, but may not be as serious as once thought. The overall level of

taris is relavely low, even for many developing countries; so that it is more likelythat trade creaon will outweigh trade diversion in bilateral or regional blocs. Firms

are not complaining loudly about the legal burden due to ligaon over rules of origin,

or about the administrave cost of tracking the relevant agreements and rules when

making trade or investment decisions. Finally, rms have discovered that if they are

disadvantaged by the creaon of a free trade area to which their home government

does not belong, they always have the opon of locang a factory within the area,

thereby beneng from the lack of barriers within the region. This opon may sll

mean a distoron in the global locaon of producon facilies relave to a world of

no barriers, but it is likely that this eciency loss is relavely modest.

Why does this discussion of the theorecal argument about free trade and global

versus bilateral or regional agreements maer? American ocials were inially

skepcal of free trade areas, but atudes have shied over me, especially with

the disappointment in making progress with the current Doha Round of WTO

negoaons. Ideas and theories do maer, and in this case the theorecal ground

about how to proceed with lowering or eliminang trade and investment barriers

around the world has shied over the past several decades.

THE STRATEGIC CONTEXT AND THE

EVOLUTION OF APEC

Since the end of World War II, the United States has regarded itself as having strong

strategic interests in East Asia. The Communist victory in the Chinese civil war in

1949, plus the Korean War, helped to create the belief that East Asia was a crucial

baleground in the Cold War, especially as Southeast Asian naons were emerging

from colonial rule. The story of failure to establish a regional counterpart to the North

Atlanc Treaty Organizaon in Asia is well known. With the failure of the Southeast

Asia Treaty Organizaon (SEATO), the U.S. government opted for a hub- and-spoke

strategy of bilateral security agreements. This strategic posture maers for trade andother economic policy as well.

Since the late 1960s, various Asian governments (and parcularly Japan and

Australia) were interested in building a trans-Pacic regional economic organizaon

to discuss trade and other business and economic issues.6 The U.S. government

inially resisted this idea. The original proposal for an organizaon resembling the

eventual Asia Pacic Economic Cooperaon (APEC) group was presented as a report

to the U.S. Congress in 1978, but elicited no interest in Washington. As a paral step

toward an ocial organizaon, the Pacic Economic Cooperaon Council (PECC)

was established in 1980, a group in which some government ocials, including

from the U.S. government parcipated unocially in their private capacity.7



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Why was the U.S. government reluctant to parcipate in a trans-Pacic organizaon?

One factor was the strategic context. The U.S. government was used to dealing

with East Asia on all issues in the bilateral framework that had come to dominate

strategic policy toward the region. Why should the U.S. government endorse

a regional body, even if it was to be ostensibly for economic discussions, whichmight interfere in the carefully craed hub-and-spoke strategic approach to the

region? In addion, the U.S. government at that me had deep misgivings about

any regional organizaon that might end up including parcipants from the other

side of the cold war divide (i.e. China, Vietnam, or Laos). Finally, economic ocials

in American administraons remained rmly commied to a global approach on

major trade and investment policies.

When APEC nally emerged, it was the iniave of Australia, with quiet prodding

by the Japanese government. With two regional allies making the request for

parcipaon, the U.S. government reluctantly agreed to parcipate. But soon the

U.S. posion on regionalism and APEC changed, for four important reasons.

First, Prime Minister Mahathir of Malaysia began to speak of forming an East Asian

Economic Caucus (EAEC), a grouping that would include the ASEAN countries plus

Japan, China, and Korea (but not Australia or New Zealand). His rhetoric was explicitly

an-Western and racist (hence the Australia and New Zealand exclusion), which

worried the U.S. government. The U.S. Secretary of State when this idea was rst

proposed, James Baker, responded by declaring that it would be imprudent for Asian

naons to draw a line down the middle of the Pacic to exclude the United States.

A regional economic organizaon in Asia excluding the United States would cause

American rms to suer from trade diversion (especially losing out to their Japanese

rivals) and potenally jeopardize American strategic involvement in the region.

Therefore, for strategic reasons it now behooved the U.S. government to promote

APEC as the appropriate regional organizaon in order to stymie the creaon of the

EAEC. If the region was to form new instuons anyway, the trans-Pacic format was

beer from the U.S. strategic standpoint than the East Asian alternave.

Second, in the late 1980s and early 1990s, the U.S. government remained wary of the

regional aims of Japan. Mahathirs EAEC would, in this view, provide an organizaonin which Japan could wield power to the detriment of American rms, especially

if the outcome were a regional free trade bloc. To be sure, Japan was an ally of the

United States, but it was also viewed as economic rival. The Japanese government had

been somewhat more acve at that period of me in indicang dissasfacon with

American trade policy and in expressing interest in a stronger relaonship with Asia

as an alternave to close economic es with the United States. This lt to Asia was

somewhat contradictory to the Japanese eorts to bring about the creaon of APEC

in the 1970s and 1980s, but reected the growing disenchantment with American

trade policy (either aempng to limit Japanese exports to the United States, or to

open Japanese markets to imports) by the early 1990s. Since Japan was a key Americanstrategic ally, it served American strategic interests to keep Japan engaged with APEC

rather than driing toward a new EAEC, a dri that could undermine the alliance.


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Table 1. U.S. Free Trade Agreements

Country YearImplemented

Australia 2005

Bahrain 2006

Canada** 1994

Chile 2004

Colombia* 2011

Costa Rica*** 2004

Dominican Republic*** 2004

El Salvador*** 2004

Guatemala*** 2005

Honduras*** 2005

Israel 1985

Jordon 1996

Korea* 2011

Mexico** 1994

Morocco 2004

Nicaragua 2005

Panama* 2011

Peru 2006

Singapore 2004

Notes: *Raed by Congress but not implemented.

**Originally a bilateral agreement with Canada in 1987, incorporated into NAFTA (with Mexico) in 1994.

***These countries are members of the regional Central American Free Trade Agreement (CAFTA).

Source: Oce of the United States Trade Representave, Free Trade Agreements, hp://www.ustr.gov/trade-

agreements/free-trade-agreements (January 15, 2012).

This table indicates that the U.S. government did maintain an agenda of pursuing

bilateral and regional agreements even as the global Doha Round negoaon in

the WTO remained uncompleted and APEC proved disappoinng as a vehicle for

negoang open trade. Note that the United States had created trade agreements

with a number of individual APEC members by 2011 (Australia, Canada, Chile,

Korea, Mexico, and Singapore).

Eorts to push forward on bilateral and regional agreements might have been

more vigorous over the past decade without the 9/11 aack and the subsequent

preoccupaon of American foreign policy with the war on terrorism, and specically the

invasions of Afghanistan and Iraq. The head of USTR in 2001, Robert Zoellick, pushed for

the start of the Doha Round in the fall of 2001 by casng it into the framework of the

war on terror. That is, terrorism may be fostered by poverty and envy. Economists (likeZoellick) believe that open trade and investment fosters economic growth, providing

the mechanism to reduce poverty and disparies between rich and poor countries.

However, this line of argument did not become a major element in the administraons


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rhetoric or policy during the war on terrorism. President Bush, for example, did not

press other leaders for a successful conclusion to the Doha Round negoaons nor did

he include references to Doha very oen in public statements.

The Obama administraon did not develop any clear trade agenda in its rst twoyears in oceeven geng the already negoated bilateral agreements with

Korea, Colombia, and Panama submied to Congress was delayed unl 2011.

The global recession and the negave polical image of losing jobs (by lowering

trade barriers at home as the price for geng other naons to lower their

barriers), combined with the importance of union support for the Democrac

Party makes the reluctance to pursue an acvist trade policy understandable. Nor

did the administraon have an overarching policy toward East Asia. Like the Bush

administraon before it, much of the foreign policy energy was absorbed by Iraq

and Afghanistan. Relaons with Japan, Korea, and China were governed more by

reacons to specic events without an overall agenda.

By 2011 the Obama administraon was ready to focus on Asia. With troops

withdrawn from Iraq and the beginning of the endgame in Afghanistan, the

administraon could refocus on East Asia, a shi in the fall of 2011 dubbed the

pivot.8 Concerns about China provided a major movaon for the strategic

policy pivot. China connued to grow rapidly (making it increasingly important to

the United States economically). But a series of incidents, such as the ramming

of a Japanese coast guard ship by a Chinese shing vessel in the fall of 2010 (and

subsequent angry pressure on Japan when the captain was detained in a Japanese

jail), the embargo that same fall on exports of rare earth metals for which China

is the major world supplier, and Chinas unhelpful stance at the United Naons

Security Council on developments in the Middle East during 2011 all indicated that

policy toward China and East Asia needed more aenon.

The Obama administraons embrace of TPP, therefore, should be seen in light

of this strategic policy history. The reinvigorated strategic approach to East Asia

in 2011 provided a renewed opportunity to include economic policy as part of

overall policy, much as earlier economic policy toward the region was inuenced

by strategic concerns. Unlike the 1980s, the economic concerns had shied largelyfrom Japan to China. How and why TPP specically t the new strategic focus on

East Asia in 2011 is considered later in this chapter.

SERVICES TRADE

One of the most signicant developments in internaonal trade over the past half-

century has been the rise of internaonal trade in services. Furthermore, trade in

services is generally more closely linked to foreign direct investment than is the

case for merchandise trade, since the provision of many services requires a physical

presence in the market where the service is oered. The original GATT agreementconcerned only merchandise trade. Creaon of the WTO in 1994 brought with it

a rst step toward inclusion of services, in the form of the Agreement on Trade

in Services. That agreement remains limited in scope and applicability to many



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specic service sector issues. Nor does the WTO address issues related to foreign

direct investment. As services trade has expanded, therefore, bilateral and regional

free trade negoaons have provided a vehicle for pursuing these increasingly

signicant issues that have been largely unanswered in the WTO.

Service sector trade is of parcular interest for the United States, for three

important reasons. First, like all advanced countries the structure of the economy

has shied away from manufacturing toward services. Second, like the world in

general, services trade has become relavely more important for the United States

over me. Third, unlike merchandise trade, the United States maintains a surplus

in trade in services. Assuming that surplus to represent an American comparave

advantage in services (relave to manufactures), it is understandable that the U.S.

government would have a parcular enthusiasm for reducing barriers to services

imports in other countries (much like the enthusiasm the U.S. government had

in the earlier post-World War II era when the United States had a surplus in

merchandise trade and pressed for global reducons in taris).

Using World Bank data, manufacturing was 23% of GDP in the United States in 1981,

falling to only 13% by 2010. Services, on the other hand, were already 63% of GDP

in 1981, rising to 78% by 2010.9 The shi in employment over a longer me period

is even more dramac. In 1950, the share of total employment in manufacturing

was 32% while services were 42%; by 2010 manufacturing was down to 11% while

services were up to 68%.10 With the rise of services as a share of both output and

employment over me, and with an overwhelming share of jobs and output in the

service sector, it should be no surprise that issues related to that sector would draw

more aenon from government.

Decades ago, economists thought of internaonal trade predominantly in terms

of merchandise trade. Most services, the thinking went, must be consumed

where they are created, liming possibilies for internaonal trade (as in the

case of the ever popular introductory economics course example of haircuts).

However, an increasing array of services has been traded over the years, ranging

from architectural, legal, and accounng services to showings of Hollywood lms

(which generate royalty payments that are counted in the balance of paymentsdata as part of services trade). But it is true that some services must be delivered

where they are created. The increasingly internaonal nature of acvity in those

industries shows up more in increased foreign direct investment.

Figure 1 shows U.S. services trade relave to the size of U.S. trade in merchandise.

Services exports were just over 30% of the size of U.S. merchandise exports in

1960, expanding to over 40% by 2010 (aer a decline in the rao during the

1970s). Although this increased relave size of services exports is not a dramac

change, it is certainly sucient to explain why services have claimed more

aenon on the part of trade negoators. Figure 1 also indicates that the risingrelave importance of services trade applies only to American exports; measured

as a percentage of the size of merchandise imports, services have declined over

the past half-century. From a large 50% in 1960, services imports were only 20%

the size of merchandise imports by 2010.


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Figure 2 shows the trend in the dollar value of services exports and imports. As

might be expected given the opposite movements for exports and imports in

gure one, gure 2 shows a rising trade surplus of the United States on trade in

services. Beginning in the 1980s, the U.S. surplus on trade and services reached

$146 billion by 2010. Although this surplus was far smaller than the U.S. decit in

merchandise trade ($646 billion), the surplus is large enough to aract aenon

as a paral oset to the decit on merchandise.

Similar trends are evident in American direct investment abroad. Direct investments

(FDI) are those in which the investor has managerial control of the asset. That is,

Figure 2. U.S. Trade in Services (in US$ billions)

Source: Bureau of Economic Analysis, United States Department of Commerce, U.S. Internaonal

Transacons, 1960-present, hp://www.bea.gov/internaonal/index.htm (January 22, 2012).

Figure 1. U.S. Services Trade Relave to the Size of Trade in Manufactured

Goods (as a %)

Source: Bureau of Economic Analysis, United States Department of Commerce, U.S. Internaonal

Transacons, 1960-present, hp://www.bea.gov/internaonal/index.htm (January 22, 2012).



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FDI represents paral or complete ownership and eecve control of corporaons

in other countries. They can include paral or complete purchases of exisng rms,

or creaon of new joint ventures or wholly owned rms. Figure 3 shows what has

happened to the stock of FDI owned by Americans, expressed as a share of GDP.

From the mid 1980s, the stock of FDI owned by Americans has risen sharply as

a share of GDP, from only 9% in 1985 to 30% by 2010. Some of that investment

is in manufacturing, but the majority of American direct investment abroad is in

services. In 2000, 22% of the stock of American direct investment abroad was in

manufacturing and 66% in various service industries (with the remainder in mining,

construcon, and agriculture). Just ten years later, only 14% was in manufacturing

and 80% in services. Some of the internaonal trade, in services, therefore,

Figure 3. Stock of Foreign Direct Investments Held Abroad by Americans asa Share of GDP (as a %)

Source: Bureau of Economic Analysis, U.S. Department of Commerce, Internaonal Investment Posion,

Yearend posion, 1976-2010, hp://www.bea.gov/internaonal/index.htm#iip (January 22, 2012).

shows up as repatriated earnings from service-sector direct investments abroad

rather than through actual cross-border trade. These data on trade and investmentprovide a clear picture of the rising importance of internaonal engagement of

American rms in exporng services or selling them locally abroad.

The internaonal issue for these industries is not taris, as in the case of

manufactures, but regulaons governing entry and compeve behavior in each

service industry. As noted earlier, the WTO has sll made relavely lile progress

in working out robust agreements covering service industries. Therefore, the rising

importance of services to the U.S. economy and the increasing export of those

services push the U.S. government in the direcon of negoang bilateral and

regional free trade agreements in which service industry issues can be included.


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TPP

Aer more than a decade of minimal focus on APEC, dri with the Doha Round, and

a preference for bilateral trade agreements, the U.S. government has now embraced

the TPP negoaons. TPP ts well with the evolving U.S. global and regional strategyin the second decade of the century in several ways, reecng the three issues

discussed in this paper.

First, consider the strategic reengagement on Asia in 2011. Economic policy has

always been intertwined with strategic policy. Therefore, TPP represented one

possible way to bring economic relaons with the region into the newly reenergized

strategic approach to East Asia.

Second, and related to the rst point, the decade-long single-minded absorpon

with military engagement in foreign policy faded, opening the way for trade andinvestment issues to gain a greater standing in the hierarchy of foreign policy issues

to be pursued with East Asia. To be sure, the huge global macroeconomic/nancial

problems accompanying the global recession of 2008-2009 absorbed considerable

government aenon, but trade and investment issues did not, and the internaonal

policy dialogue related to the global recession implied lile involvement for East

Asia (other than the dispute over the exchange rate with China). Therefore, as the

wars wound down, it was easier for the U.S. government to reengage on regional

trade and investment issues. Perhaps the rst evidence of that reengagement was

the eort by the Obama administraon to submit to Congress (successfully) bilateral

trade agreements with Korea, Peru, and Panama. Those agreements were actuallyle over from the Bush administraon (with some addional tweaking by the Obama

administraon). In terms of new engagement at the regional level, though, joining

the TPP negoaons was a convenient vehicle for reengagement.

One probable reason for the embrace of TPP specically was the fact that the concept

of a Free Trade Area of the Asia-Pacic (FTAAP) had been discussed in Washington for

several years. C. Fred Bergsten, the respected founder and head of the Peterson Instute

for Internaonal Economics (a major think tank in Washington), was vigorously pushing

the concept of the FTAAP.11 Bergsten had been a voice for using APEC for this purpose

in the mid-1990s when that organizaon had been the focus of American trade policytoward the region. Bergsten did not take a posion in the Obama administraon, but

his presence in the city, contacts, and convocaon of meengs on trade issues gave

him a considerable role in shaping discussion of trade policy ideas. TPP is not the FTAAP,

since it includes only a subset of the governments that belong to PAEC. Nonetheless, it

represented a start in that direcon if one believes in the noon of building blocks. The

chapter by Peter Petri specically considers the possibility of a movement toward an

FTAAP driven by TPP and other sub-regional agreements. To the extent, therefore, that

the concept of FTAAP was in play in Washington policy discussions, joining the group of

countries already engaged in the TPP process was a rather logical step to take.



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Third, TPP t well into the increased importance of dealing with China as part of the

strategic engagement with East Asia. The Obama administraon is adamant that the

TPP negoaons are not an aempt to isolate or surround China, and they may be

correct. Perhaps it is beer to see TPP as a response to Chinese interest in either an

ASEAN+3 or China-Japan-Korea free trade area. Either of those combinaons involvesboth the straighorward trade diversion losses that would negavely aect American

rms, and a strategic gain for China in the region (pulling other East Asian naons

closer to itself). Neither outcome is in American economic or strategic interests.

Therefore, TPP can be viewed as a defensive move to counter rising Chinese inuence

in the region. In the world of proliferang FTAs, the U.S. government cannot stop

East Asian governments from forming agreements among themselves (and China

already has an FTA with the ASEAN naons as a whole), but creang an addional

trade group that includes the United States sends a signal of U.S. engagement in the

region to counter the rising inuence of China.

Furthermore, despite administraon protestaons, there can be no doubt that TPP

provides a convenient pressure point on China. U.S. entry into the TPP negoaons

came at a me when it was convenient for the U.S. government to show some

displeasure toward China, due to the increasingly naonalisc and aggressive nature of

Chinese policies at home and abroad noted earlier.

Fourth, in the context of reengagement on trade and investment issues, the U.S.

government was confronted with the connuing stalemate on the Doha Round. Begun

in late 2001, those negoaons are now in their second decade. The dismal record of

inability to bring these negoaons to a close increased the aracveness of regional

and bilateral approaches to trade and investment from the perspecve of the U.S.

government. The alternave analysis would be that governments have become so

enamored of regional and bilateral agreements that the energy was sucked out of the

Doha Round negoaons. Given the generally tepid approach of the U.S. government

to all trade negoaons in the past decade, this alternave interpretaon of global

versus regional approaches does not seem correct.

Fih, TPP includes the advantage of mulple parcipants in the Asia-Pacic region.

As noted earlier, economists believe that regional free trade areas are more likely toproduce benets that outweigh the trade diversion liability of this approach. More

important, TPP allows a regional approach that avoids the problems upon which

APEC stumbled in the late 1990s. APEC provided the Obama administraon with

a venue at which to push the idea of TPP, but the negoaon itself is not an APEC

iniave.12 That is, TPP is simply a coalion of the willing (or supposedly willing).

Those APEC member countries that are either disinterested in parcipang, or are

not encouraged to parcipate (like China) can remain outside the negoaon. If

those governments that are parcipang are serious about their commitment, the

conclusion is that an agreement will be easier to reach.

Sixth, TPP ts the eort of the U.S. government to push lowering barriers to

trade in services. All U.S.-negoated bilateral and regional free trade agreements

have included extensive agreements on trade and investment issues related to

services. TPP will be no excepon.


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Seventh and nally, TPP has somewhat accidently become a vehicle for the Obama

administraon to engage Japan. Possible inclusion of Japan in the TPP negoaons

arose when the prime minister of Japan expressed interest in parcipang (originally

suggested by Prime Minister Kan Naoto, but then pushed formally by Prime Minister

Noda Yoshihiko). Even though the Obama administraon has ocially welcomedJapans decision to seek admission to the negoaons, the reality is that Japans

involvement remains somewhat problemacal. Japan expressed interest in a bilateral

free trade agreement with the United States in the late 1980s, but ever since that me,

the U.S. government has been reluctant to pursue such a negoaon with Japan out of

concern that the Japanese government is not ready to open up as much as would be

necessary to create a successful agreement. Those concerns arose out of the years of

dicult negoaons on a myriad of dierent trade issues related to opening Japanese

markets from the 1960s to the mid-1990s. TPP, therefore, represents the rst me in

een years that the United States would have to confront the problem of Japanesetrade barriers and the reluctance of the Japanese government to take major steps to

reduce them. Parts of agriculture (principally rice) are the most obvious examples of

remaining barriers, but a variety of service industries (ranging from nance to provision

of healthcare) and manufactured products also retain signicant import barriers. Much

depends, therefore, on the atude of the U.S. government on the queson of trade

negoaons. If the decision is that aer a virtual hiatus of een years the me has

come to once again deal with Japans trade barriers, TPP oers a useful format to do

so. The presence of other governments in the negoaon to mount pressure on Japan

to make substanal oers in the negoaons helps to take some of the burden o

the U.S. government. Furthermore, should negoaons with Japan in the context ofTPP be successful, the economic importance of TPP would be greatly enhanced by

the inclusion of two rather than just one large country. Japans presence would also

enhance the strategic importance of TPP, since Japan would be the big parcipant other

than China in either an ASEAN+3 or China-Japan-Korea trade group.

CONCLUSION

Three decades ago, American trade policy was rmly rooted in a global approach

centered on the GATT. Somewhat reluctantly, American policy shied, as did that

of most other countries around the world. While the Doha Round connues to

be stalemated, the U.S. government has negoated a number of bilateral and

regional agreements. TPP now provides an opportunity to connue in that

direcon. This chapter has argued that TPP ts logically into the evoluon of

American foreign policy way in several ways.

First, the inial opposion to bilateral and regional agreements due to the

dominance of theorecal support for the most-favored-naon principle of the

GATT faded over me. For more than two decades, the U.S. government has

pursued bilateral and regional free trade agreements. TPP is simply the latest

iniave in this approach, especially given the connued stalemate on the WTOs

Doha Round of global negoaons.



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Second, TPP ts in the evoluon of American strategic policy toward East Asia.

Since the late 1980s, the U.S. government has embraced economic policy

engagement with East Asia as a means of fending o narrower East Asian-only

groupings that would be detrimental to American strategic and economic interests

in the region. Inially the concern was a grouping that would include Japan, sinceJapanese rms were major global competors to American rms. Japan pulling

away from the United States economically to join an East Asia group would have

been detrimental to American interests. Concern over Japan has faded, only

to be replaced by concerns over China. Given both Chinese moves to pull the

region toward itself economically through possible new regional or sub-regional

trade blocs, plus Chinas more aggressive foreign policy stance in the region, TPP

provides an opportunity to strengthen American involvement in East Asia.

Third, pursuit of trade negoaons (bilateral or regional) with East Asian

partners ts with the strengthening resolve to address access issues aecng

internaonally compeve American service-sector industries. Given the global

compeveness of these rms, TPP would provide an opportunity for them to

become more deeply embedded in East Asian markets, mainly through direct

investment. That deepening has both economic benetsfor American rms

and the economies of the host countriesand the strategic impact of increasing

the visible presence of linkages to the United States.

For all these reasons, the U.S. government is likely to pursue the TPP negoaons

with considerable eort. Whether TPP will serve as a stepping-stone toward an

FTAAP, or simply a counter to either ASEAN+3 or China-Korea-Japan, a successful

conclusion to the TPP negoaons would bring economic and strategic benets.

REFERENCES

1. Two examples of standard presentaons of trade theory are, Thomas Pugel, InternaonalEconomics 14th Edion (McGraw Hill Irwin, 2009), pp. 33-90; and Paul Krugman and MauriceObseld, Internaonal Economics: Theory and Pracce,8th Edion (Pearson Addison Wesley,2009), pp. 12-110.

2. The General Agreement on Taris and Trade (GATT 1947), pp. 32-36, available at WTO LegalTexts, hp://www.wto.org/english/docs_e/legal_e/legal_e.htm (January 20, 2012).

3. The World Bank, Regional Trade Agreements, hp://www.wto.org/english/tratop_e/region_e/region_e.htm (January 22, 2012).

4. Jagdish Bhagwa, U.S. Trade Policy: The Infatuaon with Free Trade Agreements, DiscussionPaper Series No. 726, Columbia University Department of Economics.

5. See for example, C. Fred Bergsten, Compeve Liberalizaon and Global Free Trade: A Visionfor the Early 21st Century, Working Paper 96-15, Peterson Instute for Internaonal Economics,hp://www.iie.com/publicaons/wp/wp.cfm?ResearchID=171.

6. For a detailed history of the evoluon of Asia Pacic instuons, see Hugh Patrick, FromPAFTAD to APEC: Economists Networks and Public Policymaking, Columbia Universitys APECStudy Center, Discussion Paper Series, No. 2, January 1997, especially pp. 1-17.

7. For the evoluon of instuons culminang in the creaon of APEC, see Edward J. Lincoln, EastAsian Economic Regionalism (Washington, DC: The Brookings Instuon, 2004), pp. 114-39.

8. Kenneth Lieberthal, The American Pivot to Asia: Why President Obamas turn to the East iseasier said than done, December 21, 2011, Foreign Policy, hp://www.foreignpolicy.com/arcles/2011/12/21/the_american_pivot_to_asia (January 21, 2012).


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9. World Bank, World Bank Development Indicators, online database.

10. Bureau of Economic Analysis, U.S. Department of Commerce, Naonal Income and ProductAccounts Tables, Table 6.5A. Full-Time Equivalent Employees by Industry, hp://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 (January 21, 2011).

11. One of the rst expressions of this idea was C. Fred Bergsten, The Free Trade Area of the AsiaPacic Is the Next Step Forward for APEC (and for the World Trading System), November 2006,Speeches and Papers, Peterson Instute for Internaonal Economics, hp://www.iie.com/publicaons/papers/paper.cfm?ResearchID=687 (January 23, 2012).

12. The Leaders Declaraon at the end of the 2011 APEC meeng, for example, makes no directreference to TPP. See, The 19th APEC Economic Leaders Meeng, hp://www.apec.org/Meeng-Papers/Leaders-Declaraons/2011/2011_aelm.aspx (January 22, 2012).



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South Korea: Which Way Will it

Go on Asian Integraon?

HYUNG-GON JEONG


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208 | Joint U.S.Korea Academic Studies

Since 1990, Regional Trade Agreements (RTAs), including Free Trade Agreements(FTAs) and Customs Unions, have spread rapidly on the basis of the WTO systemthat was launched in 1995; 224 FTAs were reported to GATT/WTO by late 2011, many

of them in Asia.1 Korea, China and Japan have already signed FTAs with ASEAN and

individual ASEAN countries. The posive atude of East Asian countries toward

FTAs has contributed to trade liberalizaon in the East Asia region, and discussions

surrounding ASEAN are becoming more acve. Integraon, however, is dicult to

achieve due to the clash between China and Japan, the former hoping to pursue an

East Asian FTA (EAFTA) within the ASEAN+3 (China, Japan, South Korea) framework;

while the laer prefers a Comprehensive Economic Partnership in East Asia (CEPEA)

within the ASEAN+6 (India, Australia, New Zealand) framework. Discussions entered

a new phase as Japan, which has favored ASEAN+6, expressed its willingness to

parcipate in TPP (Trans-Pacic Strategic Economic Partnership Agreement) at the

APEC Summit in November 2011.

TPP was rst launched by Chile, New Zealand, Singapore, and Brunei (Pacic 4 or

P4) and has become one of the leading economic integraon systems in the Asia-

Pacic; the United States, Australia, Malaysia, Peru, and Vietnam are parcipang

in the negoaons, while Japan, Canada, and Mexico have declared their interest.

Aer President Obamas suggeson that South Korea and Malaysia join TPP, their

responses are awaited. These recent trends may have a great impact on the

future of East Asian economic integraon. China, which has been supporve of

ASEAN+3, is already shiing toward integraon through ASEAN+6, as suggested

by Japan. These changes in the trade environment will have signicant inuenceon the future of the South Korean economy. Under the assumpon that CEPEA of

ASEAN+6 and TPP centered on the United States will clash, this chapter analyzes

the eects the two systems would have on the Korean economy, and assesses

which would be more desirable.

THE CURRENT STATUS OF ECONOMIC INTEGRATION

IN THE EAST ASIAN AND ASIA-PACIFIC REGIONS

This chapter rst compares the main economic indicators of CEPEA and TPP. In the

analysis, TPP includes the P4, the ve countries in negoaons (Australia, Malaysia,

Peru, U.S., and Vietnam), those who expressed an interest in parcipang at the

APEC summit in Hawaii (Canada, Mexico, and Japan), and lastly, South Korea. As

shown in Table 1, ASEAN+6 accounts for 49% of the world populaon, which is

considerably larger than the 12.1% in TPP. Yet, it only accounts for 27.4% of the

world economy, which is much lower than the 41.2% of TPP. In world trade, it

comprises 27.8%, while TPP has 29.3%.

Figure 1 shows intraregional trade shares of ASEAN+3, ASEAN+6 and TPP. The

intraregional trade of ASEAN+3 and ASEAN+6 are steadily increasing. The gure

for ASEAN+6 was 33% in 1990, but increased to 45.1% in 2010. The percentage

of intraregional trade between TPP countries, however, dropped sharply from

54.7% in 1990 to 44.4% in 2010, yielding a lower trade share for those countries.


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Table 1. Economic Indicators of Major Economic Blocs in the Asia-Pacic Region (2010)

Economic

BlocsStates

Populaon

(Million)

EconomicScale (GDP)

(Billion)

GDP per

capita

Total Trade

(Billion)

ASEAN+3

CJK

S. Korea 49 1,014 20,756 857

Japan 1,341 5,878 4,382 2,974

China 128 5,459 42,783 1,466

Sub Total1,518 12,351

8,1365,297

(22.3%) (19.6%) (17.5%)

ASEAN

Brunei 0 12 29675 11

Cambodia 14 12 814 14

Indonesia 238 707 2,974 293

Lao DPR 6 6 1,004 6

Malaysia 28 238 8,423 416

Myanmar 61 45 742 16

Philippines 94 200 2,123 131

Singapore 5 223 43,117 665

Thailand 64 319 4,992 380

Vietnam 88 104 1,174 164

Sub Total598 1,866

3,1202,096

(8.79%) (2.97%) (6.91%)

Total2,117 14,217

6,7147,394

(31.1%) (22.6%) (24.4%)

ASEAN+6

India 1,191 1,632 1,371 550

Australia 22 1,237 55,672 426

New Zealand 4 141 32,163 62

ASEAN+3 2,117 14,217 6,714 7,394

Total3,335 17,227

5,1668,432

(49.0%) (27.4%) (27.8%)

Figure 2 examines South Koreas export share to each bloc. It connues to rise to

ASEAN+3 and +6. In the early 1990s, its export share was 56.2% to TPP countries

and 28.4% to ASEAN+6; however, in 2003 its exports to ASEAN+6 exceeded

exports to TPP. In 2010, exports to ASEAN+6 reached 48.8%, while exports to TPP

decreased dramacally to 28.4%.

Imports from ASEAN+6 were 36.3% of its total in 1990, which rose steadily to 52.4%

in 2010, while imports from TPP dropped from 58.4% in 1990 to 37.6% in 2010. In

comprehensive terms, trade between South Korea and ASEAN+6 increased from

32.5% in 1990 to 50.5% in 2010; on the other hand, trade between South Korea

and TPP showed a sharp decrease from 57.4% in 1990 to 32.7% in 2010.

Jeong: South Korea: Which Way Will It Go?


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TPP

Brunei 0 12 29,675 11

Chile 17 203 11,827 127

New Zealand 4 141 32,163 62

Singapore 5 223 43,117 665

Australia 22 1,237 55,672 426

Malaysia 28 238 8,423 364

Peru 30 154 5,205 61

USA 310 14,527 46,860 3,246

Vietnam 88 104 1,174 153

Canada* 34 1,577 46,303 817

Japan* 128 5,459 42,783 1,466

Mexico* 109 1,034 9,522 630

S. Korea* 49 1,014 20,756 857

Vietnam 88 104 1,174 153

Canada* 34 1,577 46,303 817

Japan* 128 5,459 42,783 1,466

Mexico* 109 1,034 9,522 630

S. Korea* 49 1,014 20,756 857

Note: 1) Numbers in parentheses indicate the percentage of the world total 2) Countries

with an asterisk are prospecve ones that are in negoaons for or considering TPP

membership parcipaon.

Source: IMF, World Economic Outlook [Online]; IMF, Direcon of Trade Stascs.

Figure 1. Trends of Intraregional Trade on a Regional Level

Source: IMF Direcon of Trade Stascs. TPP member countries P4, ve countries in negoaons

(Australia, Malaysia, Peru, U.S., Vietnam), those who have expressed their willingness to parcipate

at the APEC summit in Hawaii (Canada, Mexico, Japan), and South Korea.


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SOUTH KOREAS DECISION: ASEAN+6 VS. TPP

Comparing Macroeconomic Eects of CEPEA and TPP2

To determine which would be more benecial for Korea, I compare TPP and ASEAN+6,

esmang macroeconomic eects (real GDP growth and changes of welfare level)

with the CGE model. This model incorporates interdependent individual sectors within

the economy (such as producon, consumpon, and investment) and foreign sectors

(imports and exports) and is used to esmate the ripple eects following changes in the

global economic environment, such as the trade environment related to FTAs and DDAs,as well as climate change. This study uses the standard GTAP model, most commonly

used of all CGE models, and the GTAP V 7.1 data. GTAP V 7.1 is based on data covering

2004; re-released in June 2010 with modied, complemented V7 content.

Figure 2. Trends of Koreas Intraregional Export Share

Source: IMF Direcon of Trade Stascs.

Figure 3. Trends of Koreas Intraregional Import Share

Source: IMF Direcon of Trade Stascs.



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Table 2. Classicaon of States

Country

1 S. Korea

2 China

3 Japan

4 United States

5 EU (27 Countries)

6 ASEAN

7 India

8 Rest of the World (ROW)

Basic Assumpons of the CGE

For this analysis, countries will be classied into Korea, TPP parcipants or those

considering parcipaon (twelve countries), and remaining ASEAN countries, the

United States, China, Japan, India, the EU, and others. Analysis proceeds under

the assumpon that the KORUS and Korea-EU FTAs have taken eect.

For convenience and reliable results, industries are classied into 1) rice, 2)

grains, 3) other agricultural products, 4) manufacturing and 5) services. Due to its

sensivity, rice has been exempt from concessions in all signed FTAs; therefore it

is classied separately from grains. In grain imports, Korea applies quota taris

and, when necessary, adjusts the volume of market access, so the actual tari ratemay be lower than what is indicated on the GTAP data. Everything considered,

the range of tari reducons is assumed to be around half the product. Because

this analysis shows macroeconomic eects and analyzes various forms of FTA,

simplied industrial classicaon is applied. KORUS and Korea-EU FTAs are

assumed to be in eect, while FTAs signed with countries directly involved in

TPP and ASEAN+6 are assumed to be newly upgraded as agreements come into

eect. Commodity markets are assumed to be open-ended; however, the rice

market of Korea and Japan is assumed to be closed. Service Tari Equivalent has

not been considered. Producon input has been divided into ve categories:

land, low-skilled labor, skilled labor, capital, and natural resources. Classicaon

of inputs complies with default conguraon given by the data. While land is not

transferable and natural resources also have transfer limitaons, low-skilled and

skilled labor, and capital have been set to move freely between industries. Factors

of producon can move between industries, so changes in domesc producon in

accordance with tari reducons are possible. However, the GTAP model does not

assume that factors of producon are transferable between countries; therefore,

movement of labor and resources between countries cannot be considered.

The East Asia FTA and TPP in this CGE analysis assume the model of capitalaccumulaon. The capital accumulaon model supposes that the short-term

economic gain from an FTA draws investment and savings, leading to addional

accumulaon of capital that works as one of the main producon factors, and

is mostly used to analyze economic expansion eects from the FTA. It is highly


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possible that an East Asian FTA will be pursued not simultaneously, but in a step-

by-step process based on a long-term perspecve, so it is advisable to use the

capital accumulaon model, rather than the stac model, for analyzing mid to

long-term eects. Furthermore, considering that the stac model only takes the

increase of domesc producon from tari reducon into account, it is likelythat the possibility of varying ripple eects depending on various industries

will be overlooked. In some industries, the eects of tari reducons are quick,

making capital accumulaon possible as soon as the FTA enters into force; on

the other hand, other industries may not even register any eects of tari

reducons. Therefore, short-term eects will only reveal limited signicance.

Also, because the economic eects of an FTA reinforce the fact that reinvestment

leads to acvaon of industries, the capital accumulaon model is deemed more

reasonable compared to the stac model.

Table 4 compares the expected economic eects depending on whether Korea

signs an FTA with ASEAN+6 or TPP countries. It can expect 2.69% in actual GDP

growth when an FTA is signed with ASEAN+6, while expecng 1.44% in actual GDP

growth when signing with TPP countries. Moreover, in welfare changes, Korea

can expect a prot of $16.571 billion, while in the case of TPP, Korea can expect$7.787 billion. In conclusion, the economic eects of ASEAN+6 are larger than

that of TPP from Koreas perspecve because trade liberalizaon with China, one

of Koreas largest trade partners, has been considered. It is necessary to compare

the relave size of expected FTA eects, rather than the eects driven by FTA,

and to observe the direcon of economic eects. Furthermore, the absolute

value of gures resulng from this analysis may be prone to change, due to the

gap between model assumpons and actual negoaons.

The CGE model may not reect qualitave changes due to shis in the trade

environment and the eects of non-tari barriers because it is centeredon changes in taris, domesc producon, exports and imports, and other

quantave changes. Because this CGE model ulizes the GTAP DB Version 7.1,

it is unable to reect the changes in East Asian and global trade environments aer

Table 3. Economic Integraon Perspecves

Scenarios Details

East Asian FTA

ASEAN+CJK+India,

Australia, New Zealand

Refer to KORUS

(Korea-USA) FTA

100% import

tari eliminaon

TPP (13 States) Refer to KORUS(Korea-USA) FTA 100% importtari eliminaon

Note: The rice market has been exempt from tari cuts. Koreas grain taris for China and Australia, the

agricultural taris of the Korea-India CEPA, etc. have been considered.



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Table 4. Economic Impact of ASEAN+6 & TPP: With Reference to KORUS & Korea-EU FTA

Reference to KORUS

& Korea-EU FTA

100% import tari eliminaon

Impacts (%) on Real GDPChanges in Welfare

(100 Million US$)

ASEAN + 6 2.69 165.71

TPP 1.44 77.87

Note: The eects of FTA signed by Korea, China, and Japan with ASEAN individually have not been

taken into account.

2004. Although GTAP DB 7.1 has been released with paral modicaons made on

GTAP DB Version 7, it sll relies on data from 2004; therefore countries like China that

have connuously registered high economic growth exceeding 10% annually have

not been taken into account, nor does it show the eects of the 2008 nancial crisis.

CAN TPP BECOME A HIGH STANDARD FTA THAT

LEADS THE GLOBAL ECONOMY?

Although the GDP size of TPP member countries is greater than that of ASEAN+6, TPPs

reliance on regional trade shows a downward trend, while ASEAN+3 and +6 show a

stable increase. ASEAN+6s reliance on regional trade is higher than that between

TPP members. Mutual trade between East Asian countries is higher than trade with

countries outside the region. Even in the case of Korea, exports and imports to and

from ASEAN+3 and ASEAN+6 connue to increase; however, trade with TPP membercountries is in connuous decline. Furthermore, the expected economic eects from

ASEAN+6 are larger in the CGE model analysis. Pursuing cooperaon with ASEAN+6

seems to be more desirable. However, if TPP is signed on a higher level than the

present KORUS FTA, and is concluded as a high standard FTA that will lead the global

economy, than Korea must consider TPP parcipaon. Thus, the following secons

examine if TPP can pursue the trade liberalizaon process le unnished at APEC,

conclude a high standard FTA, and lead to new global economic norms.

Countries are adopng a quantave approach in measuring the level of trade

liberalizaon, deeming that more than 90% of the total trade share betweencountries sharing an FTA needs to be open, in order for it to be considered trade

liberalizaon. If so, have the P4who are the founding members of TPPopened

more than 90%; has their agreement reached a higher level of trade liberalizaon

than bilateral FTAs signed with other countries regarding tari and non-tari

barriers and the service sector; and does their agreement show higher standards

compared to the U.S.-led negoaons with P4+?

P4 countries have been more posive towards opening their markets than they

were when they each signed bilateral FTAs as individual countries. Some scholars

argue that because Singapore, Brunei, and New Zealand took an acve open-door

policy even before P4 negoaons, in reality, economic gains acquired through

parcipaon in P4 were not great. This argument makes sense, considering that

Singapore had already abolished taris on most of its imports; that Brunei, as a small


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country, imports lile and depends on Singapore for most of its imports; and that

New Zealand had already achieved a high level of trade liberalizaon even before

joining P4. However, Chile was able to achieve market opening. For example, in its

FTA with Canada and Australia, Chile excluded dairy products from target items;

however, in the agreement with New Zealand it abolished 100% of its import tari,regardless of the fact that New Zealand is an agriculturally advanced country. Chile

has also adopted very open policies toward P4 countries with respect to reducing

import taris. Furthermore, in the FTA with Canada (CCFTA) signed before P4, Chile

only selected around 75% of total imports from Canada as customs-free items, but it

liberalized imports for 89.3% of items from New Zealand and Singapore.3 In addion,

at the TPP P+ negoaons with Australia, Chile agreed to import 96.9% of import

items customs-free.4 With Canada, Chile also set een years as a grace period

regarding the phased tari reducon aer the FTA entered into force, while it set ten

years as a transion period for New Zealand (six years for Australia).

If P4 countries are contribung more to mutual trade liberalizaon by lowering taris

compared to other FTAs, are they also pursuing trade facilitaon policies by eliminang

non-tari barriers? GATT Art. XXIV (b) clearly states that in order to truly liberalize

trade, ORRC (Other Restricve Regulaons of Commerce) must be abolished. The P4

Agreement, Arcle 3.8, contains the following phrases, in accordance with its rights

and obligaons under the WTO Agreement and in accordance with other provisions

of this Agreement, a reminder that other measures can be taken between member

countries apart from trade remedy measures xed by the WTO. Singapore, Brunei,

and New Zealand have not applied any strong trade remedy measures to any tradepartners, which shows that the level of openness is relavely high even in the aspect

of non-taris. Recalling that Chile has overused these measures toward countries

except for the P4, it can be said that Chile is not doing so because trade between

countries is small, and has determined that even if such a system were abolished, the

negave impact on the economy would not be great.5 In any case, the fact that trade

remedy measures are applicable between member countries when FTA goes into

force means that restricve measures can be taken in future intra-P4 trade; but they

may be ambivalent, knowing it might inhibit trade liberalizaon.

As menoned earlier, GATS Arcle V implies trade liberalizaon regulaons inservice trade; however, the statement is also vague as to what is stated in the

commodies sector. Only Singapore, Chile, and New Zealand out of P4 agreed to

liberalize trade in services when the P4 Agreement was concluded, while Brunei

agreed to submit a schedule for liberalizing the services trade to its trade partners

within two years aer the Agreement goes into eect. But Brunei has sll not

turned in the corresponding agreement, which means that P4s FTA agreement

has not achieved the rules of substanal sectoral coverage explicitly stated in

GATS. It is noteworthy that the three countries, excluding Brunei, put condions

of trade in services on the negave list, which shows that even if they seem

completely open on the surface, they are actually adopng rather strict condions,

as seen in Arcle 12.8. They ruled out opening up various services provided by

the government, such as air transportaon and nancial services. In the case of

Singapore, the arcle on services contains relavely relaxed condions compared to



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those of FTAs concluded with other naons; but it adopted rather strict regulaons

compared to the case of the U.S.-Singapore FTA. In its FTA negoaons with the

United States, Singapore fully agreed to open nancial, recreaonal, cultural

and sports, transportaon services, etc. Likewise, even in the service sector, P4

countries are showing ambivalent atudes. It is sll subject to debate whetherthey have achieved substanal sectoral coverage pursued by GATS.

In general, P4 takes more liberal policies compared to other FTAs, but also betrays

strong proteconism in some parts due to the interests of each P4 country. However,

in order to establish a new world economic order, the TPP Agreement should be

a model for future FTAs, by further strengthening current trends in liberalizaon.

TPP has expanded into an economic integraon system, which contains nine

countries total including the main countries of the Asia-Pacic region; the United

States, Australia, Peru, Vietnam, and Malaysia; newly joining the early member

states of P4. The concern is now whether the ve addional countries will be

able to conclude a high standard FTA that is more open than the P4 Agreement

and includes the aforemenoned contents. Let us look at the feasibility of TPP, by

examining the main issues discussed in the TPP negoaons involving the United

States, and the posion of each parcipang country on each issue.

The Posion of the United States

The United States is promong TPP parcipaon policies in earnest, as an alternave

to the stalled discussions on the FTAAP through APEC and as a plaorm for the

transion to FTAAP. Negoang through twenty-four working groups, the UnitedStates aims to introduce the Planum Standard that covers all the items above.6

Many of the regulaons that were not able to be included in exisng FTAs, such as

indiscriminate eliminaon of taris on agricultural products, intellectual property

rights, labor, environment, rules of origin, selement for investor-state dispute,

and arcles related to compeon (linked to SOEs) have been included in the TPP

negoaons. One of the reasons why the United States started to take an interest

in TPP is because the P4 Agreement included many of the condions it supported

during the process of negoang FTAs. Furthermore, Chile and Australiawho have

recently concluded bilateral FTAs with the United Stateswere parcipang in the

TPP negoaons; so the United States wants to promote addional negoaons

on issues that are sensive, within a mullateral framework.

Out of the twenty-four items under negoaon shown in Table 5, items that

are controversial include: dispute resoluon, compeon-related provisions,

rules of origin, indiscriminate tari abolion including agricultural products,

and strengthening of intellectual property rights.7 Selement of investor-

state disputes refers to a system in which disputes between foreign invesng

companies in markets and local governments are led at the Internaonal Court

of Jusce. Australia and New Zealand are reluctant to accept due to concerns

about U.S. superiority in legal know-how, while the United States is opposed to

an internal bilateral dispute between a company and local government seled

by a third party. The compeon provision is an arcle aiming to regulate unfair

acons of state-owned companies to ensure fair compeon between the public


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Table 5. Twenty-Four Negoaon Items on the TPP

Main Agendas

Chief negoators' meeng

Market access (goods)Services(Free trans-border mobility of service

industries)

Market access (Fabrics/clothes) Services (Finance)

Market access (Agricultural products) Services (Communicaons)

ROOs (Rules of Origin)

Services

(Free trans-border mobility of supply

chains & management skills)

Addional measures for Trade Facilitaon E-commerce

Sanitary and Phytosanitary Measures Investment

TBT (Technical Barriers to Trade) Environment

Trade Proteconism (Safeguard, etc) Labor issues

Government Procurement Issues on various organizaons

IPR (Intellectual Property Rights) Dispute selement

Fair compeon-related clauses Cooperaon

Crosscung issues

Source: Japan Looks to Trans-Pacic Partnership to Transform its Economy, JETRO, Feb. 2011, cited from the

ministries of foreign aairs, trade, economy and industries of states parcipang in the TPP.

and private sector. This is a provision that countries with a relavely large public

sector, such as Malaysia, Vietnam, and Brunei, are against. It specically targets

Chinas future parcipaon in TPP, and is expected to be a huge burden on China,

which has many large public companies. Rules of origin is a provision causing

the sharpest controversy between those that suggest consistent across-the-

board rules of origin, and those that argue that the rules of origin in exisng FTAs

should not be invalidated. There are also concerns that goods linked to mulple

countries cannot receive protecon from TPP if across-the-board rules of origin

were to be introduced. Indiscriminate abolion of taris including agricultural

products is also intertwined with the interests of each country. The United States

is insisng on complete abolion of taris on commodies by the end of 2014.

Yet, the U.S. logic is unjused because it has so far been persistent in claiming

the permanence of the U.S.-AUS FTA and the U.S.-New Zealand FTA, which havehelped to achieve a status quo of taris on American sugar and dairy products.

The parcipaon of Japan in TPP negoaons is expected to make selement

even more dicult. Due to s opposion from its own farmers, Japan will try



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its best to protect its agricultural sector, complicang U.S.-led negoaons. On

intellectual property rights, the United States is expected to seek applicaon of

the IPR arcle that was concluded in the KORUS FTA. The IPR provision in the

KORUS FTA is an enhancement of the May 10th Agreement between former

President Bush and the Democrac Party, aimed at strengthening property rights,parcularly in the pharmaceucal industry.8 If the May 10th Agreement allows

the producon of generic drugs in developing countries, the new provisions

prohibit it. Inseron of this provision is controversial, even in the United States,

between generic drug manufacturers and pharmaceucal companies.9

Following are the reasons why the United States is trying to include such a wide

range of items all at once. First, it wants to send a message that through an across-

the-board conclusion that the TPP may have export inducement eects compared

to exisng FTAs, leading to a posive impact on domesc employment and income

enhancement. Ron Kirk, the U.S. Trade Representave (USTR), argues that TPP should

funcon as a new trade system in the 21st century that embodies high standards of

providing new market approach opportunies to American workers, farmers, service

providers, and small business owners. Through this the U.S. administraon expects

to draw out polical support from small to mid-sized businesses and labor unions

that have been relavely disadvantaged by exisng FTAs.10 Second, the United States

wishes to become the new center of the Asia-Pacic economic community through

the achievement of the Planum Standard, containing China, which is trying to achieve

East Asian economic integraon by excluding it through ASEAN+3 and +6, and using

the expansion of TPP as a basis for negoaons with countries outside the region.11

Itaims to provide a reference point that is capable of inducing transformaon in Chinas

trade and industrial structure and drawing Chinas large state-owned companies into

a compeve market system.12

American media percepons about the U.S. government parcipang in TPP are not

wholeheartedly posive. The U.S. auto industry is opposed to Japans parcipaon

in the TPP, while its meat and dairy industries show deep concern over meat and

dairy products imported from agriculturally strong New Zealand. Furthermore, the

media warn that fully opening the sugar industry during individual negoaons

with Australia will invite strong opposion from the American sugar industry anddistrust of the government. The United States tried to proceed with TPP formaon

through bilateral negoaons with countries that have not yet concluded FTAs at

the second TPP negoaons amongst eight countries held on June 14-18, 2010 in

San Francisco. However, such plans hit a wall when Australia, New Zealand, and

Singapore sought unied regulaons through mullateral negoaons. The United

States has expressed this posion because it has already signed individual FTAs with

ve out of the eight countries; so concluding FTAs with New Zealand, Brunei, and

Vietnam, would create more favorable circumstances to enter the TPP economic

bloc. Other countries strongly opposed this.13 When the United States proposed to

adopt the same contents as in the KORUS FTA, opposion from the P4 members

indicated that negoaons would not be easy.14


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The Posion of Japan

Kan Naoto concluded the Basic Policies on Comprehensive EPA on November 9,

2010, and soon aer, ocially declared acve parcipaon in TPP negoaons at the

APEC General Meeng held in Yok

TPP or ASEAN +3: Alternative Plans for Regionalism and Free Trade Pacts

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